Fault Lines

On economic affairs and foreign policy, political fault lines inside the ruling UNF-SLFP coalition have begun to emerge more clearly than ever this past week. As the campaign against Central Bank Governor Arjuna Mahendran begins to crystallise, with the SLFP, anti-corruption activists, civil society and even the ‘Joint Opposition’ vehemently opposing his reappointment, both Sirisena and Wickremesinghe have legacy decisions to make in the next 15 days

Last Thursday (9), President Maithripala Sirisena walked into the Parliament Complex in Battaramulla when the no faith motion against his Finance Minister Ravi Karunanayake was being taken up – one day later than scheduled – for debate. The President spent most of Thursday inside his offices in Parliament, and even took a seat inside the Chamber while senior Government members including SLFP Ministers took the floor to defend Karunanayake against the Joint Opposition charges.

On the one hand the President became a talisman of sorts to ensure members of his own Party in the Unity Government would hold the line in the face of sustained efforts by the ‘Joint Opposition’ to persuade SLFP MPs to vote with their conscience on the no confidence motion. His presence served to reinforce his support for his Finance Minister who was under fire from the pro-Rajapaksa faction of the UPFA and helped the UNF-SLFP ruling coalition to show a solidly united front.

But the proceedings also posed a unique opportunity for President Sirisena to send clear signals to the United National Front led by his Prime Minister, Ranil Wickremesinghe. Using his loyalists inside the Chamber that day, President Sirisena made his position on Central Bank Governor Arjuna Mahendran abundantly clear. One by one, SLFP Ministers staunchly loyal to President Sirisena rose to extend support to Minister Karunanayake, but each speech had the same caveat – Governor Mahendran had to go.

Minister for Social Empowerment and Welfare S.B. Dissanayake harked back to remarks President Sirisena made publicly in June 2015 that it was best that the Central Bank Governor resigned his office. “Once a President says such a thing, usually the official responsible should tender a resignation. That is to be expected from decent officials,” Dissanayake asserted last Thursday.

Fisheries Minister Mahindra Amaraweera, one of President Sirisena’s closest SLFP confidants, told the House that it was imperative for the Government to act against the Central Bank Governor. Chandima Weerakoddy, former Deputy Speaker and Petroleum Minister in the Sirisena Cabinet, charged that Governor Mahendran’s conduct had been found ‘undesirable’ and “should be removed for the sake of the President and the Prime Minister”.

Shifting dynamics

The no faith motion debated last Thursday was a flimsy affair, wholly undeserving of the seriousness with which this kind of crucial Parliamentary motion is treated. Badly drafted with only vague charges levelled against the Finance Minister, the motion failed to induce robust debate in the House. Ultimately, the motion served only to provide an opportunity for the Government to show its strength in Parliament, defeating the motion by 94 votes, even though it was five votes short of a two-thirds majority.

But in other respects, the debate on the motion was crucial to understanding a shifting political dynamic likely to manifest in the coming weeks. In effect, the vote on the no confidence motion had become a quid pro quo. President Sirisena and his SLFP would throw their weight behind Wickremesinghe’s choice for Finance Minister, but they would draw the line at the Central Bank Governor. Interpretation of the SLFP Ministers speeches last Thursday seems to suggest an implicit trade-off between the President and the UNF on the no faith motion – essentially Karunanayake for Mahendran.

Arjuna Mahendran is the son of Sri Lanka’s former Ambassador to the UN, Charlie Mahendran. Charlie Mahendran was a career diplomat, and subsequently became a member of the UNP Working Committee, a staunch ally and friend of Prime Minister Ranil Wickremesinghe. Arjuna Mahendran once served as a senior economist at the Central Bank of Sri Lanka. A Singaporean citizen, Mahendran has served in senior positions at leading banks worldwide, including HSBC, National Bank of Dubai (NBD) and Credit Suisse.

Sirisena’s reservations

In spite of what appears to be a stellar career in international banking, President Sirisena expressed reservations about the appointment of Mahendran to head the Central Bank from the very outset, delaying placing his signature on the appointment letter for several weeks. The reservations primarily concerned Mahendran’s son-in-law, Arjun Aloysius, a Director at Perpetual Treasuries, a subsidiary of Perpetual Capital Holdings – the company that had allegedly dubious dealings with the former Government particularly with regard to transactions at the Colombo Stock Exchange – dealings that were consistently made public by Deputy Minister Harsha De Silva, then an Opposition MP.

When the President finally signed off on Mahendran’s appointment as Governor, Arjun Aloysius promptly resigned as a Director of Perpetual Treasuries, which was a primary dealer registered with the Central Bank, citing potential conflicts of interest. The Governor’s son-in-law however continued to be a shareholder of Perpetual Capital Holdings, the parent company.

Barely a month passed before the worst fears of the President and good governance activists who had rallied behind his candidacy were realised. Soon after the Central Bank’s first Treasury bond auction in February 2015, allegations surfaced that company owned by the Governor’s son-in-law had unduly profited from the auction. Given the relationship between Perpetual and Governor of Central Bank, allegations mounted about conflict of interest and the possibilities of insider-trading. Perpetual Treasuries, owned by Aloysius’ parent company, won Rs. 5 billion of the Rs. 10 billion bonds issued by the Central Bank’s Public Debt Department, which controversially raised the offer volumes 10 times from the original Rs. 1 billion. During the auction, Perpetual Treasuries had submitted bids on its own account and also Rs. 3 billion through the State-run Bank of Ceylon.

When the political sphere exploded on news of controversy, Prime Minister Wickremesinghe appointed a three-man committee to probe the alleged bond scandal. The Committee, which the Opposition claimed was composed of lawyers loyal to the ruling party, stopped short of blaming the Governor but observed that “the bidding pattern of Perpetual Treasuries was unusual and warranted a further investigation”.

UNF badly wounded

By the time Parliamentary elections were declared in early June, a minority Government riding high after the enactment of the 19th Amendment in April 2015 was badly wounded. At the August 2015 general election, the Central Bank bond fiasco was the only major controversy plaguing the eight-month-old Sirisena-Wickremesinghe administration, and easily cost the UNF eight to 10 seats in the contest.

Ahead of that poll, President Sirisena went public with his recommendations to his Prime Minister that the Central Bank Governor was discrediting Wickremesinghe himself, and should resign without further ado. But a fundamental rights case filed by good governance activists including Chandra Jayaratne challenging the bond auction was dismissed by the Supreme Court in May 2015 and the UNP has clung to this dismissal as evidence of Mahendran’s vindication ever since. An interim report on the Bond controversy by the Committee on Public Enterprises (COPE) submitted in June 2015 was never tabled or debated on because Parliament was dissolved in June 2015.

The rest, as they say, is history. Mahendran, who only stepped aside for the duration of the investigation by the three-member committee, remained in office. But his tenure at the helm of the country’s banking regulator has been marked by scandal and controversy ever since. From allegations about his extravagance that he continues to strongly deny, to the latest fracas with regard to allegations that the Governor sought to reverse a decision by an independent regulatory unit of the Central Bank on the appointment of the Chairman of Lankaputhra Development Bank as extensively reported in the Daily FT, controversy doggedly follows the Governor.

After the 2015 Parliamentary election, the newly-constituted COPE under Chairman and JVP MP Sunil Handunetti is in the process of drafting its report on the Central Bank during Mahendran’s tenure in office. Handunetti’s committee decided to re-examine last year’s bond controversy, and put the Auditor General on the job. Even during this critical investigation, the conduct of the Governor and his officials has been found to be remiss.

Last Wednesday (8), COPE summoned Governor Mahendran and Deputy Governor P. Samarasiri over their refusal to grant access to the Auditor General (AG) to information regarding the controversial Treasury bond sales of February 2015. COPE had mandated an investigation of the sale by the AG, but Central Bank officials were blocking access to vital information, the AG had complained.

Deputy Governor Samarasiri had tried to explain to the Committee last Wednesday that the details of the sale were sensitive and could result in instability of the markets if made public. COPE members would have none of that, and instructed the Governor and his Deputy to furnish the documents requested by the AG by 15 June. Governor Mahendran is reported to have provided assurances to COPE that his officials would meet the Committee’s deadline.

Emblematic

Daily FT learns that COPE was hoping to conclude its Central Bank examination before Governor Mahendran’s term came up for renewal on 30 June. A strong COPE report on irregularities in the Central Bank’s transactions would have strengthened President Sirisena’s hand before he has to make the decision on whether Mahendran will stay or go, activists agitating for his removal told Daily FT. However, sources said this deadline is looking increasingly unrealistic.

In an administration that swept to power on the promise of rooting out corruption and cronyism in the political system, Arjuna Mahendran has become emblematic of continued tolerance of less than transparent practices and blatant conflicts of interest by the new Government. This week, the UNF rolled out Leader of the House Lakshman Kiriella to mount a defence of Mahendran, a defence largely centred on the fact that the charges against the Central Bank Governor had yet to be proved. Slaves to cronyism in a deep rooted political system, the UNF old-guard remains incapable of comprehending the power of perception in the post-January 2015 culture of political engagement.

It was sensitivity to public perception that resulted in the spate of public letters by junior ministers and deputy ministers refusing the multi-million rupee vehicles the Government was ready to order on their behalf at a cumulative cost of Rs. 1.17 billion. It was growing public anger that convinced even the usually impervious Prime Minister Wickremesinghe to roll-back the decision to purchase new Government vehicles temporarily. It was public perception that prompted President Sirisena to make an address to the nation to disavow Mahinda Rajapaksa ahead of the August Parliamentary poll. Public pressure precipitated the resignation of Cabinet Minister Thilak Marapana over his associations with Avant-Garde Maritime Security.

Even if the Government is yet to realise it, they inadvertently ushered in a new political ethos in January 2015.

Doomed

In the court of public opinion, Governor Mahendran is already doomed; and even if this could be overlooked in the Treasury bond fiasco, his conduct since that scandal broke has done little to allay concerns. In banking, integrity is everything. And perceptions of integrity are equally crucial. The fact that allegations of misconduct continue to plague the top official at Sri Lanka’s banking regulator throws the entire financial system into flux and undermines investor confidence and the stability of the banking sector. No charges need to be proven to precipitate that. The experience of Governor Cabraal at the helm of the Central Bank should have taught the UNF Government something.

For 18 months, the UNF failed to act, and as a result, its administration has been grievously damaged by the allegations against the Central Bank Governor. Finally, this month, the issue comes to a head.

Mahendran was appointed to complete the 18 months left in Cabraal’s term after the latter resigned following Mahinda Rajapaksa’s defeat in January 2015. If President Sirisena reappoints him, Mahendran will hold office for a six-year term, beginning in July 2016.

Anti-corruption activists are seeing this moment as a crucial determinant of the Government’s future trajectory on corruption. “If the Governor is reappointed, that will mark the end of what is left of this Government’s anti-corruption drive,” Anti-Corruption Front Advisor Ranjith Keerthi Tennakoon told Daily FT. Yesterday, civil society groups that strongly backed President Sirisena’s candidature commenced a large-scale campaign demanding the Governor’s removal. Over the next two weeks an intensive poster campaign and possible litigation could follow as the movement gathers steam.

Seeking resolution

Several meetings have ensued between President Sirisena and his Prime Minister over the matter of the Central Bank Governor. President Sirisena believes he cannot in good conscience sign the reappointment, with civil society groups and his own party members breathing down his neck. Cabinet Ministers who are close aides of the President have sought to bring Sirisena and Wickremesinghe together over the past week to find a way out of the looming crisis.

Even if the Governor does not get a reappointment when his term ends this month, the tragedy for the UNF and Prime Minister Wickremesinghe will be that the party proved an abject failure in reining in one of its own in a timely fashion. Had Mahendran resigned of his own volition or if the UNF had somehow convinced him to make a quiet exit, the controversy would have been nipped in the bud and the Wickremesinghe-led UNF would have been credited with action instead of apathy on corruption issues even within its own administration.

Instead, if the Governor goes on 30 June, the UNF will be the party licking its wounds while civil society, anti-corruption activists and even the Joint Opposition share credit for effecting his removal. Even the SLFP which is a constituent in the unity coalition will have something to crow about. In the event of Mahendran’s departure, the SLFP will redefine its role within the ruling coalition as an internal watchdog, a crucial component for keeping the Government honest, in effect stealing the UNF’s thunder as custodians of the Yahapalanaya mandate of January and August 2015.

The tussle over the reappointment of the Central Bank Governor brings a major fault line within the ruling coalition into the public domain. For months there have been rumblings within the President’s camp about ‘economic experts’ in the administration he believes are precipitating an economic crisis. He has been vocal about his opposition to the Governor with confidants in both his own party and the UNP. For the most part the political cohabitation between the SLFP President and his UNP Prime Minister has rolled along smoothly. The understanding between the pair, close aides say, has allowed the cohabitation to survive already much longer than its detractors predicted.

Second fault line

The Central Governor has been a rare sticking point, and this week, a secondary fault line emerged, when the Presidential Secretariat organised a seminar on foreign policy that appeared to completely side-line the Ministry of Foreign Affairs.

‘Sri Lanka in Global Affairs: The journey since January 2015’ was held at the BMICH Committee Room A on Monday (13). The panel discussion moderated by former Foreign Secretary and recently retired Governor of the Northern Province, H.M.G.S. Palihakkara, included Eastern Province Governor Austin Fernando, Political Scientist and University Professor Jayadeva Uyangoda and former Ambassador to the UN in Geneva and France, Dr. Dayan Jayatilleka.

The inclusion of Jayatilleka proved surprising and controversial, particularly in light of his associations with the defeated Rajapaksa regime both before and since January 2015 and his consistently scathing critiques against Foreign Minister Mangala Samaraweera and Prime Minister Wickremesinghe. Questions are now being raised as to whether Jayatilleka was picked to be on the panel precisely because of his much-publicised antipathy towards Samaraweera and Wickremesinghe by Presidential aides who share his sentiments. President Sirisena has been proved most unwise in some of his post-election allegiances, appearing to ally with individuals and organisations that have an axe to grind with Wickremesinghe and Samaraweera. Some of these individuals now serve as Presidential advisors, a move that has seriously undermined trust between the President and sections of the UNP.

Monday’s programme commenced with a video highlighting the strides made by President Sirisena to uplift Sri Lanka’s global image. Interestingly, Minister Samaraweera as President Sirisena’s top diplomat did not feature significantly in the video.

In his presentation at Monday’s seminar Prof. Jayadeva Uyangoda noted that one of the key drivers of the new Government’s foreign policy was its determination to shed the foreign policy orientation of its predecessor, a point reiterated by President Sirisena himself during his speech at the event. Under the circumstances, the inclusion of Jayatilleka, a theologian of sorts for the post January 2015 Rajapaksa camp, and a strong proponent of the former President’s decision to alienate and demonise the West, defies logic.

No doubt there were other more credible detractors of the Government’s foreign policy direction, without the political baggage Jayatilleka brings to the mix, who may have been a better fit on Monday’s panel and could have offered more meaningful approaches to foreign policy for President Sirisena to consider, if that indeed was the intention of the seminar. Instead what transpired was that Jayatilleka was given a public audience with the President and a credible platform to air his criticisms of the Foreign Minister and the Prime Minister.

Predictably, Jayatilleka strove hard to drive a wedge between President Sirisena and his Foreign Minister during his remarks, praising the former’s foreign policy vision while warning him that members of his administration were failing to implement his stated policy objectives. President Sirisena was seen to be keenly listening to Jayatilleka’s views and did not move to challenge any of the former Ambassador’s premises during his own speech. Equally damaging were the scenes of bonhomie between Sirisena and Jayatilleka after the event, where the pair were seen to be exchanging pleasantries and sharing jokes.

It is not yet clear whether Monday’s event was an attempt by President Sirisena and his office to strike out and diverge from the foreign policy direction of the Foreign Ministry. But as CPA Executive Director Paikiasothy Saravanamuttu pointed out in a column about the event published yesterday, the foreign policy seminar served to effectively highlight an internal conflict within the ruling coalition that has been brewing for months. President Sirisena, unhappy with the co-sponsorship of the UNHRC resolution in September 2015 and suspicious of the IMF negotiations, could be engaged in an attempt to reassert his authority and bring Sri Lanka’s foreign policy strategies in line with an SLFP vision, that is less West-ward looking than that of the UNF.

Mutual dependence

A strange symbiosis brought about by the twin elections of 2015 lends strength to the alliance between the President and his Prime Minister. The survival of one remains crucial to the survival of the other. Still, cohabitation between two parties better accustomed to arch rivalry is far from easy. Sustainability of the alliance demands constructive engagement and mutual trust, at least between the two leaders of the coalition. And while Sirisena and Wickremesinghe may dance around the issues and engage in games of brinksmanship of the sort witnessed at the BMICH and with Kiriella’s outburst on Monday, ultimately decisions must be made to protect a mutual legacy.

Over the next 15 days, Prime Minister Wickremesinghe will be called upon to decide if he will stake his Premiership and the future of his Government on the reappointment of the Central Bank Governor. It will be an acid test for the Premier and his commitment to the principles of good governance, even when he believes his man to be innocent of wrongdoing.

As for President Sirisena, his legacy as a reformist and corruption-buster will be severely undermined if he is pressurised into reappointing Mahendran. Hailed as a consensus builder, President Sirisena has all the skills to work with the UNF to reach compromises on economic affairs and foreign policy that will strengthen his administration and insulate it from external threats. A decision to work together will empower both President and Prime Minister and do away with this necessity for inane political games and mixed messaging that casts unnecessary shadows on a Government that is still finding its feet.

The Sirisena-Wickremesinghe administration’s collective decision on the Central Bank Governor will be a crucial indicator of its commitment to the stated goals of overhauling a political system rooted in corruption and cronyism. Will it hold the line, or will its 18th month in office mark the end of that road?

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